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Thursday, August 28, 2014

Saizen REIT - Income from Japanese residential properties?

Saizen REIT is one of the biggest investment in my portfolio. Owning shares of Saizen REIT effectively means owning 138 residential properties across Japan. Yes, Saizen REIT has a total of 138 properties across 14 cities in Japan. Saizen REIT has reported its full year 2014 financial results just 2 days ago. I've blog about the reason behind investing in Japan previously which i mentioned that i also invested in another Japanese business trust called Croesus Retail trust. Croesus owns shopping centres in Japan and separately announced its financial result just this morning. I'll write up on it in another post.

Saizen's revenue and net property income increased by 3.4% and 2.6% as compared to FY 2013. DPU of 3.1 cents has been announced and adding the previous DPU of 3.25 cents in February, the total DPU for the whole year works out to be 6.35 cents. With the current stock price at 96 cents, the dividend yield is about 6.6% p.a. Of course if you've bought at lower price, the dividend yield would be much higher.

On its debt profile, its gearing ratio is 37%. This is the percentage of debt it has over its total assets. 88% of its debt have fixed interest and all its debt is long term in nature. The nearest loan maturity it has is in March 2020 which is almost 7 years from now.

Net asset value per share decreased slightly from $1.24 to $1.22 in FY2014. With the current price at 96 cents, this represents a discount to NAV of 21.3%. Saizen REIT is still at a good price. Of course, as stated earlier, investing at the current price would mean a dividend yield of 6.6% if DPU remains the same next year. If you're investing for income, you have to decide if 6.6% p.a is a fair return on investment?

The good thing is Siazen REIT DPU has been stable and increasing for the past few years since 2011. From a DPU of about 2.5 cents in 2011, DPU has increased to about 3.1 cents now. This represents an increase of about 20% for the past 3 years. It looks like it will continue to increase as rental rates pick up in Japan when the economy recovers and inflation starts to kick in after the various monetary policies implemented by the Japanese authorities.

Growth prospects for Saizen REIT
Currently, the average occupancy rate for the REIT is 91%. There is definitely more room to grow their property income even if they do not expand their portfolio of properties. According to a report as mentioned in their financial report presentation, mid market rents in the 23 ward area of Tokyo showed an increase of 1.1% from the year 2013. Rental rates should begin to pick up in other cities too. Japan has been suffering from deflation for many year now. It is time for them to get out of deflation. Well, its what the government hope so as they had set an inflation target of 2% by 2015 which is next year.

As inflation happens, property prices should pick up too. This will increase the NAV for Saizen. It will be interesting to see how the situation develops in Japan. Read related posts below to understand the motivations behind my investments in Japan. So far it has been good and maybe its time for a trip to Japan before prices rise to even higher levels.

They have hedge their currency risk in view of the falling JPY. This protects the DPU.

A lot of people are worried about the earthquake in Japan. Well, their properties is diversified across different cities so if an earthquake happens, it'll only affect a part of their properties. They also have insurance to cover the loss.

Just to add on, the insurance does not cover the full loss of the earthquake. I got this from Saizen's 2013 annual report:

Earthquake InsuranceA limited form of earthquake insurance has been purchased for Saizen REIT’s properties to provide certain coverage in a “worst case scenario” event. However, earthquake insurance in Japan may not cover the whole damage incurred and damage caused by earthquake or other natural disasters may result in losses (including loss of rent) which may not be fully compensated by insurance proceeds.

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